The Nasdaq 100 Index has rallied to an all-time high after completing a historic 2,965-point round trip off the March low. The instrument has climbed an enormous wall of worry during the three-month ascent, shaking off the biggest shock to the U.S. economy since World War II. Not surprisingly, many market players have sat on their hands throughout the advance, waiting for the second shoe to drop, but that hasn't happened yet.
The uptick assumes that shutdown orders won't happen during a second wave, allowing businesses to remain open and collect revenue, or that an effective vaccine will be manufactured in enough quantity to dampen the impact. That makes hospital utilization the most important number to watch, rather than infection rates, because governors will be forced to retreat if the evening news shows citizens dying in hallways, like they did in Italy in the first quarter.
In addition, a look back at Nasdaq 100 price action in the past decade warns that V-shaped recovery patterns are rarely followed by sustained uptrends. Bull traps have set into motion in nearly every occurrence during this period, punishing trend followers who missed the upside during the initial ascent. Many skilled traders are well aware of these analogs and could sell aggressively when the instrument attempts to push even higher.
QQQ Monthly Chart (2000 – 2020)
The Invesco QQQ Trust (QQQ) topped out at $120.50 in 2000 and collapsed when the internet bubble burst, dropping to $19.76 in October 2002. A steady but shallow advance through the middle of the decade failed to pierce the 50% selloff retracement, setting the stage for a second decline during the 2008 economic collapse. That downtrend held six points above the 2002 low, completing a long-term double bottom that underpinned buying interest into the new decade.
The instrument completed a round trip into the 2000 peak in the third quarter of 2016, ahead of a post-election breakout that booked impressive gains into 2018 when volatility generated a number of vertical whipsaws. It finally cleared this contested price zone in the second half of 2019 and topped out in February 2020, setting the stage for a vertical plunge followed by an equally vigorous bounce that has now stretched above the first quarter high.
QQQ V-Shaped Patterns (2012 – 2020)
The fund and index have carved approximately six V-shaped recovery patterns since 2012, not counting the latest incarnation. The number is "approximate" because there's no exact science in this comparison, which is looking at corrections in excess of 10% and recoveries that don't post sizable mid-wave consolidations. In this view, immediate breakouts have occurred six times, yielding an equal number of failed breakouts that trapped late-to-the-party bulls.
The similarities between events are impressive, with each rally carrying just far enough to encourage the last bull to come off the sidelines. Subsequent declines highlight significant risk in the current occurrence, relinquishing more than 50% of the prior rally's total points. More importantly, none of the six generated a sustained breakout that rewarded trend followers with multi-week upside.
March into June price action also marks the most extreme V-shaped pattern in the Nasdaq 100's multi-decade history, punctuated by a 31% decline followed by a 44% rally. The index has failed to carve a single support level during the advance while leaving behind unfilled gaps at $175 and $188. It's likely that at least one of these gaps will eventually fill, although it's foolish to predict when that might happen. Even so, market players should agree with the danger of chasing higher prices right here.
The Bottom Line
The Nasdaq 100 has completed a V-shaped rally into the February peak and broken out, but a review of market history tells traders and investors to remain skeptical about the upside.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.